Lecture Global marketing management (7th edition): Chapter 3 - Masaaki Kotabe, Kristiaan Helsen

GLOBAL
MARKETING
MANAGEMENT
Seventh Edition
MASAAKI KOTABKE | KRISTIAAN HELSEN

Chapter 3 PowerPoint
Financial Environment


Chapter Overview
1. Historical Role of the U.S. Dollar
2. Development of Today’s International Monetary
System
3. Foreign Exchange and Foreign Exchange Rates
4. Balance of Payments
5. Economic and Financial Turmoil Around the World
6. Marketing in the Euro Area

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Introduction
• Foreign exchange is the monetary mechanism
allowing the transfer of funds from one nation to
another.

• The existing international monetary system always
affects companies as well as individuals whenever
they buy or sell products and services traded across
national borders.
• Although international marketers have to operate in
a currently existing international monetary system
for international transactions and settlements, they
should understand how the scope and nature of the
system has changed
and
how
has worked over 3
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Introduction
• The 1990s – particularly, the second half of the
decade – proved to be one of the most turbulent
periods in recent history.
• The adoption of the euro as a common currency in
the European Union in 1999 has challenged the
supremacy of the dollar as a global currency.
• Financial crises in Latin America and the U.S. have
reverberated throughout the world as a global
recession.

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1. Historical Role of the U.S. Dollar
• Each country has its own currency through which it
expresses the value of its products.
• In the post-World War II period, the United States
agreed to exchange the dollar at $35 per ounce of
gold. The dollar became the common denominator
in world trade.
• In the early seventies, the U.S. dollar standard was
dropped. The result has been more volatility and a
more likely tendency for the U.S. currency to
depreciate due to persistent U.S. trade deficits.
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2. Development of Today’s International
Monetary System
• Post-World War II developments had long-range

effects on international financial arrangements.
• The negotiations to establish the postwar
international monetary system took place at the
resort of Bretton Woods in New Hampshire in 1944
which established the International Monetary
Fund (IMF).
• President Richard Nixon suspended the
convertibility of the dollar to gold on August 15,
1971.
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2. Development of Today’s International
Monetary System
• The IMF oversees the international monetary
system and its functions are as follows:
– To promote international monetary cooperation
– To facilitate the expansion and balanced growth of
international trade
– To promote exchange stability and to maintain orderly
exchange arrangements
– To assist in the establishment of a multilateral system
of payments in respect to current transactions
between member nations; to eliminate foreign
exchange restrictions

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Exhibit 3-1: Foreign Exchange Rate
Fluctuations over the Past 30+ Years

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2. Development of Today’s International
Monetary System
– To make available the general resources of the fund
temporarily available to members under adequate
safeguards; help members to correct maladjustments
in the balance of payments
– To shorten the duration and lessen the degree of
disequilibrium in the international balance of
payments to members
– The IMF created special drawing rights (SDRs) in
1969.

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2. Development of Today’s International
Monetary System
• The value of SDRs is determined by a weighted
average of a basket of four currencies: the U.S.
dollar, Japanese yen, European Union’s euro, and
the British pound.
• After the 1997-98 Asian financial crisis, the IMF has
worked on policies to overcome or even prevent
future crises.
• Another creation of the Bretton Woods Agreement
was the International Bank for Reconstruction
and Development (World Bank), supporting
economic development and poverty reduction.
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2. Development of Today’s International
Monetary System
• Two kinds of currency floats encompass free (clean)
float (allows no government intervention) and
managed (dirty) float (allows limited government
intervention).
• In March 1973, the major currencies began to float
in the foreign exchange markets.
• Today, the global economy is dominated by three
major currency blocs: The U.S. dollar, the EU’s euro,
the British pound, the Chinese yuan, and the
Japanese yen.
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3. Foreign Exchange and Foreign
Exchange Rates
• One of the most fundamental determinants of the
exchange rate is purchasing power parity (PPP).
• Formula for PPP:

Rt = R0

(1 + Infleuro)
* _____________

(1 + InflU.S.)

Where

R=

the exchange rate quoted in euro/$,

Infl = inflation rate,
t=
time period.
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3. Foreign Exchange and Foreign
Exchange Rates
•

Factors influencing Foreign Exchange Rates:
–

–
–

•

Macroeconomic Factors: Relative inflation,
balance of payments, foreign exchange reserves,
economic growth, government spending, money
supply growth, and interest rate policy.
Political Factors: Exchange rate control, election
year or leadership change.
Random Factors: Unexpected and/or unpredicted
events, fear of uncertainty, etc.

Many countries attempt to maintain a lower value
for their currency in order to encourage exports.

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3. Foreign Exchange and Foreign
Exchange Rates
• Spot versus forward foreign exchange
• Hard currencies are the world’s strongest and
represent the world’s leading economies.
• To avoid the risk of currency fluctuations, companies
use hedging.
• Target exchange rate
• Exchange rate pass-through

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Exhibit 3-4: Foreign Exchange Rates

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4. Balance of Payments
• The balance of payment (BOP) of a nation
summarizes all the transactions that take place
between its residents and the residents of other
countries over a specified time period, usually a
month, quarter, or year.
• The BOP transactions contain three categories (see
Exhibit 3-5):
– Current account
– Capital account
– Official reserves

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Exhibit 3-5: U.S. Balance of Payments, 1990 –
2014

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4. Balance of Payments
• The BOP in capital account, the mirror image of the
BOP in the current account, summarizes financial
transactions and is divided into short -and long-term
capital accounts.
• Direct investments are controlled by residents of
other nations.
• Portfolio investment includes long-term investments
that do not give the investors effective control over
the investment.

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4. Balance of Payments
• There are three balances to identify on the BOP
statement of a country:
– Balance of merchandise trade account
– The current account (including merchandise trade, trade in
services, and unilateral transfers)
– The basic balance (the current account and the long-term
capital)

• The internal market adjustment refers to movement of
prices and income in a country.
• The external market adjustment concerns exchange
rates or a nation’s currency and its value with respect to
the currencies of other nations.
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5. Economic and Financial Turmoil
Around the World
• The Asian financial crisis in the latter half of the
1990s escalated into the biggest threat to global
prosperity.
• China’s devaluation of its currency (yuan) triggered
the Asian financial crisis in 1994.
• Because of this financial crisis, Thailand lost almost
60 percent of its baht’s purchasing power in dollar
terms in 1997.
• The Indonesian rupiah lost a whopping 80 percent
of its value during the same period.

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5. Economic and Financial Turmoil
Around the World
• The Korean won depreciated 50 percent against
the U.S. dollar.
• The acceleration in Asia economic growth since
2000 can be largely credited to the Japanese
economic recovery and China’s surging import
demand.
• The South American Financial Crisis took place in

2001 when Argentina defaulted and lost nearly 40
percent of its currency value.
• The Argentina crisis also hurt Brazil.

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5. Economic and Financial Turmoil
Around the World
• Responses to the regional financial crises:
– Consumer response to the recession (see Exhibit 3-6)
– Corporate response to the recession
•
•
•
•
•
•
•
•
Chapter 3

Pull-out
Emphasize a product’s value
Change the product mix

Repackage the goods
Maintain stricter inventory
Look outside the region for expansion opportunities
Increase advertising in the region
Increase local procurement
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Exhibit 3-6: Changes in the Consumption
Pattern During a Recession

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6. Marketing in the Euro Area
• The European Union (EU) consists of 28 countries.
The 13 central and eastern European countries are
less developed than the others. (See Exhibit 3-7.)
• The eurozone economies are based in 19 member
countries and represent 22% of the world’s GDP.
• The Maastricht Treaty, signed in 1992, spelled out
the guidelines toward European Monetary Union

(EMU).
• The European Central Bank is headquartered in
Frankfurt, Germany.
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Exhibit 3-7: 19 Eurozone Countries
(as of 1/1/2015)

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